I am a big advocate of the expression “time kills all deals.” I believed it when I ran my own business, and I believe it still today as an M&A advisor.
Waiting too long for a buyer to formalize an LOI can mean disaster for a seller. I have seen it so many times where the buyer drags their feet on every step of the process, making the seller wait patiently for them to close their books, finalize another deal, secure more funding, etc., and then the buyer backs out of the offer in the end. Meanwhile, the seller is already dreaming of how they will spend the money, calculating the exact day they might close, and looking at websites to book a European river cruise the week after the close. Sales and revenue start to slip, hiring stops, and sellers begin to get nervous. It usually doesn’t end well.
And that is exactly how I thought my last transaction of 2021 might end up. Exactly a year ago last week, as I was taking a break between a few runs on the ski slope after a busy week, I looked at my phone and saw an IOI (Indication of Interest) come in from a very prominent PE firm. I had been in the market for about 1 month with my client and this was our first real IOI: a good price, no terms detail on the terms, but they wanted to close quickly. Wow, what a great way to end the week.
That next week I reached out to get a better understanding of the terms of the transaction. “All cash,” they said. “But we didn’t want all cash,” I said. We wanted to roll some of the equity to take part in the upside down the road. And then it got quiet: a couple of emails and no response. Another couple of weeks go by, still no response. Never a good sign.
While we were still looking at other buyers and continuing the “process” of running the deal, I knew in my heart that this was the right buyer. Finally, we did hear back, and they needed us to continue to wait. They were finalizing another transaction and needed time to close and begin the integration process. UGH.
So, we waited and continued speaking with other interested buyers. Meanwhile, after strict instructions not to share any of the details of our IOI, my seller continued to close month after month with actuals revenue and net income amounts that exceeded the forecast we had given the buyer. As a matter of fact, the seller would probably close the year 10% above the already healthy growth projected for the year. We had to keep this buyer interested while they were out raising more money, and now more time had passed. We were told they needed another month or so, and that if we needed to take another offer, they understood. But we didn’t want to. Instead, we did everything we could to stall and keep other buyers interested while we waited patiently for this one special buyer to update their offer. To say we were frustrated was an understatement, but we also knew this would be the perfect buyer for so many reasons.
Five months after our first IOI, we finally received our first LOI. All along we had shared our clients’ progress and healthy growth, as well as new clients that continued to be added. The LOI was much better than the IOI we had initially received. Now that a new round of funding was in place, my seller would receive a much higher value for the stock she would receive as equity in the new company. We were also in a place to negotiate a great up-side on the earnout given our current 6 month run-rate and increase in gross profit margins. We finally closed the deal 9 months after the initial IOI.
While every transaction doesn’t take this long, you might find yourself in this exact same spot, so I thought it would be worthwhile to recap some things to think about when deciding whether to wait or not wait for the offer.
When waiting for your “perfect” buyer might make sense:
1. You know in your heart of hearts that this is the perfect fit…
- Culturally – You will either be able to continue to operate on your own with guidance from your buyer, or you will be integrated into their existing company with very little disruption. Your mission and values align
- Emotionally – You are comfortable that your team has a place to grow and prosper should you depart now or some day later.
- Financially – You see a direct line of sight to a successful earnout and/or see a tremendous upside to the equity you are contributing to the new entity.
2. The buyer is a PEG or Strategic that has successfully acquired companies before and grown them.
3. Your year is going great – meaning your TTM (Trailing Twelve Months) just continues to increase, and that means your valuation will too.
4. Your other offers pale by comparison; either the price or the terms are just not as good.
5. And finally: you really don’t have to sell. Desperation is not your friend here. You really need to feel comfortable moving on if the deal doesn’t happen.
When waiting doesn’t make sense:
1. The buyer hasn’t made other acquisitions. This IS their first rodeo, and they probably don’t know what to do next or that time does kill all deals.
2. The buyer isn’t at least double your size. Integration will be a challenge and will be disruptive to the buyer and seller.
3. The buyer is not willing to present financials to you as part of signing the LOI. That means not just the P&L, but the balance sheet (BS) as well. The BS is where the truth lies.
4. They don’t have a due diligence team or external advisors helping them with this acquisition – chances are they don’t have the bandwidth to do this transaction and will make you wait while they figure that out.
5. You know you can attract other prospective buyers because your numbers are on the upswing and have been for the last few years. Because we all know there are other fish in the sea.
It’s great to see a prospective buyer really interested in your company, but it could also mean they are just “window shopping.” Most sellers know in their gut who that right buyer is, but just in case your gut isn’t loud enough, you will want to review the points made here in this article to help you determine if you wait or move on to better offers.